ETS Prices Defy Rise in Gas Prices as Middle East Conflict Continues

Why It Matters

The divergence shows carbon markets can decouple from energy price shocks, influencing investment strategies and signaling upcoming regulatory shifts in the EU’s climate framework.

Key Takeaways

• Gas prices surged 40‑70% after Middle East conflict.
• EUAs fell 15% since early February, staying near €70.
• Expected 4% emissions rise could boost EUA demand.
• Ministers from 13 states demand ETS reform for stability.
• Market sentiment remains bearish despite higher gas prices.

Pulse Analysis

The escalation of hostilities between Iran and the US‑Israel coalition has sent European natural‑gas benchmarks soaring. ICE’s December 2026 Dutch TTF contract jumped from around €31 in late February to more than €45 by early March, with the near‑month April contract climbing over 70 %. Such a surge normally triggers fuel‑switching from gas to coal, raising power‑sector emissions and, consequently, demand for EU carbon allowances. Fastmarkets estimates that a 40 % gas price increase could lift 2026 power‑sector CO₂ output by roughly 4 %, equivalent to an extra 20.5 million tCO₂e.

Despite the clear emissions signal, EUA prices have moved in the opposite direction. The ICE December 2026 EUA contract slipped 15 % from early‑February highs of €83 to about €71, and has held steady despite the gas rally. Analysts attribute the disconnect to entrenched bearish sentiment and to political uncertainty surrounding the EU’s emissions‑trading framework. A coalition of industry ministers from thirteen member states has called for an “organic revision” of the ETS to deliver a more predictable price signal, curb volatility, and protect competitiveness, further dampening speculative buying.

The decoupling of carbon‑price dynamics from energy‑price shocks carries weight for investors and corporates alike. Companies that hedge carbon exposure now face a market where price movements may reflect regulatory narratives as much as supply‑demand fundamentals. Asset managers tracking the EU carbon market must factor in the likelihood of policy‑driven adjustments, while firms in high‑emission sectors should reassess the cost of coal‑back‑up generation under a potentially flatter EUA trajectory. Looking ahead, the interplay between geopolitical risk, gas market volatility, and forthcoming ETS reforms will shape the carbon price corridor through the mid‑2020s.